Mortgage Insurance (MIP vs PMI)

Mortgage Insurance (MIP vs PMI)

Often times when one is considering the idea of purchasing a home, mortgage insurance is forgotten about when considering their monthly payment. When this happens, it can become a shock to the borrower. Mortgage insurance is always important to consider whenever one doesn’t have a minimum 20% down payment. There are two types of mortgage insurance depending on the loan program. These two types are Mortgage Insurance Premium (MIP) for FHA loans, and Private Mortgage Insurance (PMI) for conventional loans. Both of these types protect the lender in the event of a foreclosure by the borrower and allow the borrower to put less money down at the time of purchase on the home. Let’s discuss these two types further.

MIP-Mortgage Insurance Premium:

FHA loans have a minimum required down payment of 3.5%. This down payment is allowed to be a gift to the borrower. One of the reasons an FHA loan isn’t as desirable of a loan program and is more expensive to the borrower is that this government insured loan comes with an upfront MIP, as well as a monthly MIP. Currently, this upfront MIP is almost 2.00% of the loan amount and is allowed to be rolled back into the loan without it affecting the loan-to-value (LTV) ratio. The monthly MIP is paid for the life of the loan and as of recently, can never be cancelled by the borrower. The only way the monthly premium can be avoided is if the term of the loan is 15 years or less and also has a 78% LTV or less at time of origination. However, the borrower would still have to pay the upfront MIP because it is required on all FHA loans.

PMI-Private Mortgage Insurance:

Conventional loans have a minimum required down payment of 5.00%. It is important to note that the rules for gifted down payments are different for conventional loans compared to FHA loans. Unlike FHA, the minimum required down payment has to be the borrower’s money, and anything an addition to can be gifted. However, in the event of putting 20% down, the entire amount can be a gift.

Another difference is that conventional loans only have a monthly PMI and typically no upfront premium. Therefore, the monthly PMI is paid on a monthly basis along with the mortgage payment. It is required on all conventional loans when the LTV is greater than 80%; meaning the borrower has less than 20% to put as a down payment.

Dissimilar to FHA, the monthly PMI can be cancelled by the borrower if they meet the following requirement:

The LTV is at 80%,

No mortgage lates in the past year

No two month mortgage lates in the past two years

No new 2nd mortgages have been added to the home

No home depreciation has occurred.

Typically, another appraisal would need to be done again at the borrower’s expense. Moreover, PMI can be removed by the lender when the LTV reaches 78% or if the borrower’s cancellation request was approved. The lender will remove the PMI within 30 days of terminating it and any unearned premiums must be returned to the borrower within 45 days. In the event of appreciation, lenders do not have to consider any proof of appreciation so that the LTV is reached early than what is in the amortization schedule. Therefore, there are times that refinancing is a tangible benefit to the borrower by removing PMI or MIP.

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